On March 27, 2023, the SEC’s Division of Examinations released a Risk Alert highlighting its findings from the examination of newly-registered advisers. New advisers have been flagged as a group of interest by the Division in its Examination Priorities since 2013 (see our recent article on the SEC 2023 Examination Priorities).
In the Risk Alert, the Division discusses the typical focus areas reviewed during examinations of newly registered advisers. For more on PINE’s insight on the SEC examination process, check out our recent article SEC Exams: An Overview.
Our focus for this update, however, is on the insights that the Risk Alert provides into the Division’s findings regarding the key areas of compliance policies and procedures, disclosures, and marketing practices, detailed below:
Compliance Policies and Procedures. The staff observed advisers’ compliance policies and procedures that:
The SEC Staff also reviewed advisers’ annual compliance reviews and reported finding that they did not address the adequacy of their policies and procedures and the effectiveness of their implementation. Examples provided include:
- Do not adequately address risk areas applicable to the firm such as portfolio management and fee billing
- Lack procedures to enforce policy requirements or omit procedures to enforce stated policies
- An example provided is an adviser having a policy requirement to seek best execution, but not having procedures to periodically evaluate transactions for best execution
- Are not being followed by personnel
- Reasons for lack of compliance include lack of awareness or policies not being consistent with business/operations
- Using compliance manuals that are not tailored to the products, services, and business operations
- Lacking sufficient resources to comply with regulatory requirements and policies and procedures or failing to ensure expertise of compliance personnel
- Failing to document, disclose, and mitigate conflicts of interest created by the multiple roles and responsibilities of personnel
- Outsourcing business and compliance functions without assessing performance of those responsibilities or their consistency with the compliance programs
Disclosure Documents and Filings. The staff observed required disclosure documents that contained omissions or inaccurate information and untimely filings. The disclosure omissions and inaccuracies were related to advisers’:
- Not having adequate business continuity plans, including succession plans
Marketing. The staff observed advisers’ marketing materials that appeared to contain false or misleading information in relation to:
- Material or annual form updates not being made within prescribed timeframes or not at all.
- Fees and compensation
- Business or operations
- This included findings related to affiliates, other relationships, number of clients, and assets under management
- Services offered to clients
- This included findings related to disclosures regarding advisers’ investment strategy (including the use of models), aggregate trading, and account reviews
- Disciplinary related disclosures
- Websites and social media accounts
- Conflicts of interest
Registered Investment Advisers can take the opportunity to review these findings and consider what enhancements they can make to their compliance program before their next SEC examination. If you want to discuss what this Risk Alert means to you or find out more about how PINE’s Registered Investment Adviser Regulatory Compliance Support Services group can support your business, reach out to your usual PINE contact or to email@example.com.
- Advisory personnel professional experience or credentials
- Third-party rankings
- Advisers being unable to substantiate certain factual claims
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